Pub. 10 2021 Issue 4

16 M any banks across the country are at risk of CAMELS downgrades, increased deposit insurance assessment premiums, and regulatory enforcement actions due to inadequate risk management practices for their COVID-19 Loan Modification Program. Loan modifications have been part of most banks’ lending operations for many years. Before the coronavirus, such modifications were often prompted by a borrower’s “financial distress.” Banks would attempt to work with the financially distressed borrower by granting a “concession” that the bank otherwise would not consider other borrowers with a similar risk profile. An example of such a loan modification might be an interest rate reduction. Generally speaking, this type of loan modification would be categorized as a Troubled Debt Restructure (“TDR”) under accounting literature (ASC 310- 40) and reported as such in Call Reports. COVID-19 LOAN MODIFICATIONS MORE THAN JUST FINANCIAL REPORTING ISSUES When the country became engulfed with the coronavirus, both Congress (Section 4013 of the CARES Act, extended by Section 541 of the Consolidated Appropriations Act 2021) and the Regulators (April 2020 Interagency Guidance) issued information to guide banks on TDR designations for COVID-19 related loan modifications. It is critical for bankers to understand that while Section 4013 and the April 2020 Interagency Guidance both discuss the applicability of TDRs, they have materially different requirements (modification duration, date of record for current/delinquency status, etc.) for determining when the TDR designation is necessary. FinPro urges all banks to specifically designate whether the COVID-19 Loan Modification was approved under Section 4013 of the CARES ACT or under the April 2020 Interagency Guidance. This documentation should be in each loan modification file and address the following items: Also, remember that banks must maintain records on the number and dollar amount of loan modifications approved under Section 4013 and under the Interagency Guidance and report this data to the board of directors on a regular basis. Over the course of the last year, bank regulators have issued several additional Interagency documents that include guidelines on Loan Modifications. These documents have By Pat Rohan, Managing Director, FinPro’s Regulatory Team • Was borrower impacted by COVID-19? Yes/No • Was the modification pursuant to Section 4013? Yes/No ■ If yes, was the loan current as of December 31, 2019? Yes/No ■ If yes, was the loan modification between March 1, 2020 and the earlier of 60 days after the termination of the national emergency or January 1, 2022? Yes/No • Was the modification pursuant to the Interagency Guidance? Yes/No ■ If yes, was the loan current at time of modification? Yes/No ■ If yes, was the loan modification short term (i.e., 6 months)? Yes/No